The Final 10 Of 50 Faster Growing Dividend Growth Stocks: Part 5


This is the fifth of a five-part series presenting 50 dividend growth stocks that I have screened for current fair value. With this article, I will be covering 10 additional dividend growth research candidates with moderate to higher yields in addition to the initial 40 that I presented in part 1 found here, part 2 found here, part 3 found here and part 4 found here.

The first 4 parts of this 5-part series presented research candidates ranging from high to moderate yielding attractively valued dividend growth stocks. With this part 5, most of the candidates are more oriented to dividend growth investors seeking a higher total return. To be clear, most of the research candidates in this group might appeal to investors who are still a few or more years away from retirement. Although dividends are still important to this investor type, portfolio and dividend income growth are more pertinent than a high current yield.

This is the final article in this 5-part series on not just 50 attractively valued dividend growth stocks, but also a series of insights into the principles of valuation itself. Consequently, a primary focus of this series of articles is on attractive valuation. Regardless of whether you are investing for growth, current income or income growth, valuation is a universal principle that should be applied with discipline and prudence. However, being disciplined to only invest at fair valuation is more about prudence and controlling risk than it is about generating the highest possible return. Nevertheless, I believe all successful investment strategies should start with the primary focus on identifying fair or intrinsic value. Accordingly, I will conclude this series by reposting many of my views on valuation I made in previous articles.

Furthermore, I suggest that valuation is a mathematical principle and not a vague concept. Therefore, when I speak of valuation, I am referring to the mathematical calculation of the returns (including both capital appreciation and dividend income) which you could prudently expect to earn from the company’s earnings and/or cash flows. Those returns should be large enough to compensate you more than you could earn from a theoretically riskless investment like a Treasury bond.  If you are not being compensated for the extra risk you’re taking by investing in stocks, then I believe you are paying more than you should be.

“Price Is What You Pay. Value Is What You Get”

The venerable investor Warren Buffett has a real knack of putting complex concepts and ideas into simple and easily understood terms. In my opinion, his quote, “Price is what you pay. Value is what you get” is one of the more profound and important statements he has ever uttered. If truly understood, these simple words represent perhaps some of the most important bits of investment wisdom that an investor in common stocks could ever receive.

The concept of fair valuation represents the key to receiving the full benefit that these wise words provide. Knowing the “price” you pay is simple and straightforward. And, although many have an intuitive understanding of value, its deeper meaning is often only vaguely comprehended. Anyone who has truly made the effort to study Warren Buffett’s investment philosophy understands that receiving value on the money he invests is of high importance to him.

So how do you know, when buying a stock, if you’re getting value or not for your money? I contend that the answer lies in the amount of cash flow and/or earnings that the business you purchase can generate on your behalf. And regardless of how much cash flow and/or earnings the business can generate for you, its value to you will be greatly impacted by the valuation you pay to obtain it. If you pay too much you get very little value, but if you pay too little, then the value you receive is greatly increased.

Therefore, if value is what you’re looking for, then it’s important that your attention be placed on the potential cash flows and/or earnings that you’re expecting to receive. Unfortunately, few investors possess the presence of mind to focus on this critical element. Instead, investor attention is more commonly and intensely placed on stock price and its movement. A rising stock price is usually considered to be good, and a falling stock price is considered bad. However, prudent investors understand, recognize and acknowledge that the stock market often incorrectly prices the stock behind a business relative to its intrinsic value.

Another investing great offered his view on this important point: “Just because you buy a stock and it goes up does not mean you are right. Just because you buy a stock and it goes down does not mean you are wrong.” Peter Lynch “One Up On Wall Street.”

Just like the Warren Buffett quote, Peter Lynch’s quote is also based on the principle of sound valuation. The point is that a rising stock may be dangerously overvalued, while a falling stock price may indicate that the company is becoming a rare opportunity on sale.  Importantly, this can only be determined by focusing on the company’s fundamentals and the intrinsic value they represent.

Knowing the difference between a so-called “value trap” versus an attractive opportunity will materially impact not only the long-term rate of return the investor receives but perhaps more importantly, the risk they are taking to get it. As I will illustrate later, you can dramatically overpay for even the best company.  Because, it is a truism that the stock market can, and often will, inaccurately appraise the value of a business from time to time – up or down.

From what has been said so far, it should be clear that to receive value, you must know how to calculate value. Then, and only then, can you be certain that you’re investing in a stock and receiving value for the price you pay. However, there is an important caveat that needs to be introduced.

Just because you buy a stock at value doesn’t necessarily mean that you will receive a high return. This is because value, although important, is only one component of future return.  Another important component is the earnings and/or cash flow growth rate of the business.

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Disclosure: Long SO, JCOM, KR, THO at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a ...

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